Sunday, October 02, 2011

The Shale-Gas Boom Comes to the U.K. and How The Multiplier Impact Can Revive Manufacturing

THE ECONOMIST --"On September 21 Cuadrilla Resources, the first firm to drill for shale gas in Britain, estimated that 200 trillion cubic feet of gas lie in an area near the seaside town in northwest England—nearly 40 times previous projections of all of Britain’s shale resources and, in theory, four times as much gas as is still recoverable from the North Sea. Cuadrilla hopes to drill 400 wells in Lancashire in the next decade."

WALL STREET JOURNAL -- "With Cuadrilla's announcement, shale gas goes from something ignored by policy elites on the grounds that it can only be developed in America, to something that is happening in real time in Europe."

And here's a key point made by Alan Riley in the WSJ article:

"One of the overlooked consequences of the U.S. shale-gas revolution has been the multiplier impact that access to large quantities of cheap gas can have on the broader U.S. economy. Shale gas could lead to a revival of the American steel and chemicals industry, and of energy-intensive manufacturing. It may also push food prices lower, since natural gas provides 80% of the constituent of most modern fertilizer."

You should be against paying more for something then you need to. When it is cheaper to produce it here, produce it here. When it is cheaper to produce it elsewhere do that. In either case you engage in trade and benefit from that trade.

@Benjamin - I don't believe that Dr. Perry or other free trade advocates say that importing "everything" is wonderful. They say that goods should be acquired from the least expensive source (total cost of goods). If co-locating factories next to cheap energy sources makes Great Britain a low cost producer of products, it allows them to be a more competitive manufacturer. In that case, even if their labor costs were still high, it might be offset by reduced shipping costs. Additional value would be derived from faster delivery times to local customers. The point of free trade is not to import everything. It is to enable optimized trading relationships that are not artificially influenced or limited by policy restrictions.

Note that while the US did see an increase in natural gas production from 2009 to 2010, consumption rebounded.

In 2009, our consumption of natural gas exceeded production by 9%. In 2010, our consumption of natural gas exceeded production by 12%, resulting in a year over year increase in net natural gas imports (EIA), and the US remains one of the world's largest net natural gas importers.

What nonsense. There is no easy gas or oil to be found in shale. All of the estimates have been inflated and are now in the process of being reduced. Not that many years ago Mark was touting the great find in the Gulf of Mexico, the Jack Field which supposedly contained 15 bbl of reserves. But today nobody is really talking about that discovery because the amount of oil that was claimed to be there and extractable economically was simply a figment of someone's imagination.

The same was true of the Huge PEMEX discovery that was supposed to replace the declines from Cantarell. Well, a few years after the supposed discovery more than 95% of the reserves were written down as fiction. And recently we have seen the USGS take the first step to reduce its shale gas estimates for the Marcellus Shale Basin by 80%. Add to that the fact that the industry has yet to generate profits even though the best locations have already been developed and you are looking at one of the great scams of our time.

Sooner or later the optimists will be forced to concede that reality is not what they claim it is. Well, what happens then? We have already wasted more than a decade on useless capital-destroying green energy projects. Now we are wasting more time developing shale basins that are consuming as much energy as they produce. What happens when Burgan, Cantarell, and Ghawar are all in serious decline and the curtain is pulled back to expose the empty suits behind it?